Bungling the Economy, Part One, by Andy Martin

FOR IMMEDIATE RELEASE
[Note: I originally distributed this column on August 10th. You may have missed it at the time. Look again. I think you will agree my analysis was prescient, and accurately predicted the chaos to come. The economic tragedy is still unfolding. As a trained economist who worked for a senator who was a great economist, I have the unique qualifications to confront Dick Durbin on his incompetent leadership in the senate. Look for my second installment, Part Two, this week.
Andy Martin]

CONTRARIAN COMMENTARY FOR AUGUST 10, 2007

HOW DEMOCRATS AND REPUBLICANS ARE BUNGLING THE ECONOMY, A TWO-PART SERIES:

PART ONE: WHY BUSH IS WRONG ON THE ECONOMY, FINANCIAL MARKETS AND THE HOUSING INDUSTRY

THE “LAW OF UNINTENDED CONSEQUENCES” ENDANGERS WALL STREET AS WELL AS MAIN STREET

(Chicago, August 10, 2007) A hundred years ago, financial contractions were called “panics.” When the stock market collapsed and the economy faltered in 1929-1930, President Hoover assured citizens not to worry. There would be no “panic,” only a little “depression.” The Great Depression which followed threatened the very foundations of the United States. The “little ‘depression’” that turned into the “Great Depression” scarred more than a generation of Americans.

I don’t think we are on the verge of an economic collapse. Far from it. But I also think that both Democrats and Republicans are bungling the economy. The worst may be yet to come.

The unsettled conditions in financial markets are the result of government-induced errors, not family financial errors. The little people are paying the price for Washington’s mismanagement. Earlier this year, government officials began to criticize conditions in the “sub-prime” mortgage markets. Sub-prime borrowers are those individuals who for various reasons do not have the highest credit rating. Lending to such persons is admittedly slightly more risky than lending to affluent consumers. But only a tiny fraction of sub-prime loans were delinquent when regulators triggered a panic.

The sub-prime mortgage market did not originate in thin air. For decades, since the Great Depression, the policy of both Republicans and Democrats has been to encourage and expand home ownership. Home ownership has been growing and recently reached record levels, before starting to taper off. So government allowed lenders to lend, and allowed markets to function, in furtherance of a national economic policy to encourage home ownership. And it worked. There is nothing like owning your own home.

When the “panic” began earlier this year, financial columnists predicted that an overextended dollar could prove very troublesome. That is, Americans as an economy were consuming more than we were saving, and some day we would have to pay the piper. Ironically, the “housing boom” was helping to stabilize the economy, because housing demand meant mortgage demand, and mortgage demand sucked up excess liquidity (available funds) in the world economy. The United States was a good place to invest. It still is.

But regulators decided to “crack down” on the nonexistent “excesses” in the sub-prime market. There were relatively few excesses and minimal fraud. Rather, some people were overextended; and some mortgages were due to be adjusted to reflect higher market rates. The higher “market” rates, however, were not due to any misfeasance by homeowners. Rather, market rates were increasing to finance the ever-growing deficit economy of the United States. So consumers were being asked to pay higher mortgage rates to finance a deficit that they were consuming. And they are now expected to lose their homes to protect and correct the economy. Go figure.

But consumers were not the only people who were overextended. As so often happens in life, regulators shot at one target, and inadvertently hit someone else. Regulators wanted to “crack down” on sub-prime borrowers, who were really not that much of a problem. Yes, delinquency rates were higher for sub-prime borrowers; but those delinquencies could have been worked through on a gentle basis by individual lenders. When the government demanded action, lenders were forced to tighten up. The result: a government-created panic in which low income consumers were largely the innocent victims.

But they were not the biggest victims. Inadvertently, the tightening of credit standards for small borrowers lead to a weakening of the worldwide financial markets where billions and billions of dollars are traded daily. That’s when the law of unintended consequences kicked in. Instead of shaking only the foundations of sub-prime borrowers, federal regulators have endangered the foundations of the very financial system they were trying to protect.

First the small sub-prime lenders began to fail. Then dominoes started falling, unnecessarily and inadvertently. Wall Street vultures moved in to profit from the misery of Main Street. But soon the failures became larger and larger, and in time the vultures themselves were swallowed by the emerging panic. Greed begat greed begat chaos and possible collapse.

Yesterday. President Bush tried to “calm the markets.” Usually, when business executives or politicians try to “calm markets” they have precisely the opposite effect. Just ask President Hoover. Bush said he expected a “soft landing” for the economy. I’m not so sure.

First, I am not certain the president understands “markets.” Initially, markets are driven by greed, “good” greed to make a profit, to establish financial stability. Eventually emotion and excess take over. Markets, however, rarely correct on a balanced basis. Rather, excess is the linchpin of market “corrections.”

The president thinks that we may have a “little ‘depression’” in the financial markets. It could become worse. Few observers predicted or expected the tech collapse of 1999-2000. Solid companies were swallowed up in the panic that consumed the week enterprises. Today, people who only recently touted homebuilding stocks are contemplating bankruptcies by the same companies.

I have seen this chaotic and uncontrolled situation develop over the past few months while versions of this column were drafted. I think the president is wrong on two grounds. Maybe I can help him by explaining his mistaken assumptions.

First, having successfully pushed a homeownership policy, he should now stretch himself and the Republican Party to protect these new homeowners. He should not be diluting or endangering his successful homeownership legacy. What are Republicans about if not encouraging economic opportunity and risk taking?

Second, relying on the market to correct itself, when the market imbalances were created by government regulators and government excesses, may be unrealistic.

As a young law student, I studied one of the landmark Supreme Court decisions of the Great Depression, Home Building & Loan v. Blaisdell, 290 U. S. 398 (1934). The divided 5-4 court allowed states to modify contracts to prevent foreclosures. Sitting back and naively expecting “markets” to correct excesses that were triggered by government mismanagement of the economy is, to me, unrealistic. We need to act.

Expecting people whom the president characterized as having failed to read the “fine print,” and in need of “financial education,” to bear the brunt of government’s mistaken economic policies is inhumane.

The first step, always, is to admit and confess a mistake was made. Then corrective action can begin. Our own financial profligacy as a nation has created perilous times. But that is no excuse to do nothing. We are still the masters of our own economy. We can acknowledge that regulators attacked a minor problem and have created a major problem. And we can fix the problem.

We, that is the American people and the U. S. government, encouraged people to buy homes and borrow money. Now we want to stand back and do nothing because other financial conditions we created are bearing down on homeowners? I do not believe we are or should be so helpless or callous.

Republicans should awaken to the challenge, and come to the assistance of homeowners. I do not believe that sitting back while people are thrown on the streets and lose their homes—and lose their faith in the American Dream–is what Americans should tolerate. We should realize that mistaken government policies created the excesses, and we should try to engineer a soft landing instead of standing idly by and hoping the market engineers a “soft landing” all by itself. It won’t.

How about it, President Bush?

TOMORROW: PART TWO: THE DEMOCRATS ALSO BUNGLED THE ECONOMY

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Chicago-based Internet journalist, broadcaster and media critic Andy Martin is the Executive Editor and publisher of ContrarianCommentary.com. He is a chronicler of all things Midwestern and the authentic Voice of Middle America. Copyright Andy Martin 2007. Martin covers regional, national and international politics with forty years of personal experience. Columns also posted at ContrarianCommentary.blogspot.com; contrariancommentary.wordpress.com. He holds a B.S. in Economic History and Juris Doctor degrees from the University of Illinois. Comments? E-mail: AndyMart20@aol.com. Media contact: (866) 706-2639 Web sites: AndyforUSSenator.com